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Money laundering reporting obligations: rethinking the UK approach

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The Law Commission has issued a consultation paper seeking views on proposed reforms to the current suspected money laundering and terrorist financing reporting requirements. In this article for PLC Magazine, we consider the practical implications and cost for businesses of complying with the current reporting regime, as well as the key features of the proposals.

The UK requirements for reporting incidents of suspected money laundering and terrorist financing have been much criticised. In particular, law enforcement agencies have voiced concerns over the quantity and quality of suspicious activity reports (SARs) that are submitted, while those in the private sector who are subject to the reporting requirements have had to grapple with a lack of certainty in key areas of those requirements (see box “The current law”).

In July 2018, the Law Commission (the Commission) issued a consultation paper (the consultation) seeking views on proposed reforms to the current suspected money laundering and terrorist financing reporting requirements. The possible reforms suggested in the consultation are designed to result in fewer, but higher quality, SARs than are currently submitted to the National Crime Agency (NCA).

The current law

Under the Proceeds of Crime Act 2002, firms within the regulated sector are required to report suspected money laundering to the National Crime Authority (NCA). Suspicious activity reports (SARs) are the mechanism by which firms are required to make these reports.

SARs can have up to two purposes. They allow firms in the regulated sector to discharge their obligation to report suspected money laundering, and can also be used to seek a defence against money laundering, also referred to as consent, from the NCA. A parallel regime operates in relation to counter-terrorism financing under the Terrorism Act 2000.

Re-thinking the all crimes approach

Under the current regime there is no de minimis threshold in terms of the seriousness of the criminal offence that may give rise to suspected money laundering reporting requirements. This approach is commonly referred to as the all crimes approach.

Although the all crimes approach has the benefit for firms of not needing to understand the full extent of criminal activity that may have occurred before submitting a SAR, it also has some unintended practical consequences. For example, it requires certain professions in the regulated sector, such as lawyers, to disclose potential technical instances of money laundering where the value of that information to the NCA is low or negligible.

The requirement to identify and report suspected money laundering incurs significant compliance costs for firms. However, by far the greatest burden in this area falls on the financial services sector. Between October 2015 and March 2017, 95.78% of all SARs submitted to the NCA were submitted by financial services firms. In addition, implementing and maintaining core financial crime controls, including those required to identify and report suspected money laundering and terrorist financing, is estimated to cost financial institutions in the region of £5 billion each year.

The consultation considers whether the current all crimes approach should be replaced with a serious crimes approach. This would mean only criminal offences that are deemed to be serious would trigger the reporting requirement. In this context, seriousness would be assessed by reference to the type of criminal offence or applicable penalty. Alternatively, it would involve extending the defence of failing to report suspected money laundering to cover the failure to report non-serious crimes. A similar system currently operates in other jurisdictions, including in the US and Germany.

Although the Commission invites views on this alternative approach, it recognises that this approach may be problematic in practice and may further complicate the already onerous reporting requirements. For example, the Commission acknowledges that preparing and updating a list of offences that are considered to be serious crimes in this context may be challenging.

Raising the threshold for suspicion

Perhaps the most significant aspect of the consultation is the proposal to raise the level of suspicion required to report suspected money laundering to the NCA. At present, a SAR must be filed if there is a suspicion which is more than fanciful that money laundering has occurred. The Commission proposes increasing that threshold and only requiring a SAR to be submitted in the event that there are reasonable grounds to suspect that money laundering has occurred. The Commission proposes doing so by:

Maintaining the current suspicion threshold for the principal money laundering offences under the Proceeds of Crime Act 2002 (POCA), namely concealing, arranging or acquiring, using or possessing criminal property (sections 327-329).

Streamlining the test for reasonable grounds for suspicion across the offences relating to a failure to disclose suspected money laundering under POCA (sections 330-332). This would have the effect of both increasing the current threshold for the disclosure offences from mere suspicion and ensuring consistency across the various thresholds currently used in these sections.

Introducing a defence to the principal money laundering offences under sections 327 to 329 of POCA for those in the regulated sector who have no reasonable grounds to suspect that property constitutes criminal property.

Statutory guidance

The Commission also proposes that statutory guidance should be given in order to clarify the reporting obligations relating to suspected money laundering. In addition to the proposed changes to suspicion thresholds for reporting, the Commission suggests introducing a statutory requirement obliging the government to produce guidance on what constitutes suspicion in this context.

There has been considerable uncertainty around the scope of the current reasonable excuse defence in POCA of having a reasonable excuse for failing to report suspected money laundering. The consultation proposes that statutory guidance should be issued which indicates the circumstances in which it may be reasonable for a person not to report suspected money laundering. For example, if the suspected criminal conduct has no UK nexus, or if it is clear that a regulator of a law enforcement body in the UK or elsewhere is already aware of the suspected criminal activity or money laundering.

The Commission suggests that introducing guidance in these areas would help to improve consistency in how the requirements under POCA are applied, as well as decrease the number of defensive SARs filed with the NCA.

Corporate criminal liability

The consultation also seeks views on whether a new offence should be introduced which would make corporates criminally liable for the failure of their employees or associates to report suspected money laundering or terrorist financing. At present, only personal liability arises in relation to a failure to disclose suspected offences.

In the consultation, the Commission leans in favour of introducing a failure to prevent offence, which would result in corporates being held criminally liable if they failed to take reasonable measures to ensure that their employees or associates report suspected money laundering or terrorist financing. A similar offence has been used in the Bribery Act 2010 and the Criminal Finances Act 2017 (see News brief “Criminal Finances Act 2017: combating money laundering and tax evasion”).

Next steps

If implemented, the proposals are likely to provide greater clarity in relation to the current requirements to report suspected money laundering and terrorist financing, as well as introduce mechanisms which are likely to result in a smaller number of higher quality SARs being received by the NCA’s Financial Intelligence Unit.